A year defined by Covid

The President and CEO of Hufvudstaden sums up the year and looks forward.

2020 opened on a strong note with sustained growth in the
global economy. Although there were challenges, prospects for global economic development during the year were favourable.

The spread of the novel coronavirus had developed into a pandemic by the end of the first quarter, resulting in stock market declines. Countries all over the world were forced to take strong measures to reduce transmission and limit health risks. Far-reaching restrictions were introduced in Sweden, which had serious economic consequences.

Following a stabilisation in the summer and a modest recovery in the third quarter, the transmission rate accelerated into a second wave in the autumn. The authorities reinstated the restrictions and encouraged the public to practice social distancing and work from home.

International tourism has come to a virtual halt and domestic tourism has prioritised destinations outside Stockholm and Gothenburg. In spite of government support measures, there has been severe impact on several sectors, including the restaurant
industry and segments of the consumer durables trade. Unemployment in Sweden rose to around 9 per cent and GDP fell by around 3 per cent.

The Covid-19 restrictions have had temporary negative effect on Hufvudstaden’s retail spaces in prime locations in Stockholm and Gothenburg, particularly the NK department stores. This resulted in declines in rental revenue and property values in 2020.

A bright spot amidst the general uncertainty is that the vaccination process began in several countries towards the end of the year. Hopefully, this is the beginning of a gradual return to a normally functioning society, which will benefit Hufvudstaden’s well-situated properties and unique retail locations.

Accelerated change in the retail sector

Around 40 per cent of Hufvudstaden’s total revenues are generated from retail stores and restaurants. For the past several years, even before the corona pandemic, we had observed changes in consumer behaviour as rapid digital advances accelerated the
growth of e-commerce. Sales of consumer durables have increased by around 3 per cent annually in recent years. Virtually the entire increase can be attributed to the rapid growth in e-commerce, which has been further accelerated by the pandemic.

Our central market locations are used mainly for retail and office space, with few residential units. Remote work from home has resulted in a distinct shift from in-person shopping to online shopping and from city locations to suburban areas. Along with
the virtual elimination of tourism in the urban regions, this explains why in-person shopping in traditional prime retail locations has suffered during the year.

Throughout the pandemic, we have maintained close dialogue with our tenants to find the best solutions in business terms to help them bridge the pandemic. Hufvudstaden has granted individually adjusted rent rebates and helped tenants obtain various types of government support.

At heart, people are social beings with profound needs for human interaction, travel, culture, shopping and dining experiences. As we return to more normal conditions, it is extremely likely that demand for our centrally located marketplaces will rise again.

Stable office market

The office rental market has been stable with low vacancy rates in both the Stockholm CBD and Gothenburg CBD. Demand for modern, flexible offices in prime locations has been somewhat tentative, but several new leases for premises in our buildings have been signed at good rent levels. Hufvudstaden’s renegotiations of office leases resulted in rent increases of around 20 per cent overall.

Office tenants are increasingly seeking leases with a high level of flexibility. Hufvudstaden has been offering turnkey office premises within the REDO concept for several years. In addition, our own Cecil coworking facility was launched in 2021, which gives tenants a great deal of flexibility in terms of use of the premises, the term of the lease and level of service. The REDO and Cecil office concepts are an ideal complement
to our traditional and attractive offices both during and after the pandemic.

Strong but diversified property market

The Swedish property market demonstrated strong development during most of the year due to low interest rates, a shortage of attractive alternative investment opportunities and good access to capital. The total transaction volume was around SEK 200 billion, making 2020 one of the peak transaction years of all time. Demand was especially strong for logistics properties, public buildings and residential properties, resulting in declining yields and rising property values. Office properties in prime locations were also in demand. There was a modest increase in yield requirements and decline in property values for properties with a larger proportion of retail space in less attractive locations or in city locations that have been impacted severely by the pandemic.

At year-end, Hufvudstaden’s property holdings were valued at SEK 45.6 billion (47.7), down by approximately 4 per cent. The decrease in value is due to the effect of falling market rents for retail stores and slightly rising yield requirements, primarily for properties with a significant proportion of retail and restaurant space, such as the NK properties and the Femman shopping centre in Nordstan. NAV at the end of the year was SEK 173 per share (185) and the share price was SEK 136.20 per share.

A year of intense investment

Hufvudstaden executed a share buyback of SEK 500 million in September at an average price of SEK 126 per share. The buyback was thus executed at a price far below NAV, meaning that NAV per share outstanding increased. The Board of Directors believes this is beneficial to shareholders and will be proposing a renewed authorisation to repurchase shares to the upcoming annual general meeting. Investments in projects totalled nearly SEK 1 billion. Along with the buyback, 2020 was one of the most active investment years in a long time.

A comprehensive redevelopment project was completed during the year at the NK property in Stockholm, where large parts of the department store have been upgraded, several luxury brands have been established and the level of customer service has been elevated. NK e-commerce was launched at the end of the summer to further reinforce the customer offering and widen the NK target group.

The major expansion and redevelopment project at Skären 9 at Norrmalmstorg was completed at the end of the year and the law firm Advokatfirman Vinge moved back into new and attractive offices. The investment is a typical Hufvudstaden project that was
carried out in close collaboration with the tenant and will generate significant cash flows for many years to come. Foundations are being laid in preparation for the rebuilding of the Vildmannen 7 property in Bibliotekstan that was previously destroyed by fire. The building is expected to be ready for occupation in 2023.

In the company’s assessment, the share buyback and our projects will add shareholder value over time and it is gratifying that the progress of the ongoing projects has been able to proceed as planned, despite the difficult external circumstances.

Sustainable business

Sustainability and profitability are directly linked and Hufvudstaden has been working actively for a long time to attain its lofty goals concerning economic, social and environmental sustainability.

One of our key sustainability targets is to reduce the long-term climate impact of our business and we have achieved a reduction of around 90 per cent since 2010. The energy-saving measures taken within the Skären 9 project will significantly reduce energy use even though floor space will increase. With the addition of Kåkenhusen and NK Gothenburg during the year, around 60 per cent of Hufvudstaden’s holdings are now
environmentally certified.

For the third year running, Hufvudstaden was ranked first in the Large Company category in this year’s Customer Satisfaction Index survey of office tenants. This is particularly gratifying this year, and shows that we maintain a high level of customer
service regardless of the economic trend.

In the international Global Real Estate Sustainability Benchmark (GRESB), we achieved first place in the category office/retail among European property companies, confirming that we are taking the right approach from a broad perspective on sustainability.

Lower profits

Development was positive for the office business, but retail stores and restaurants suffered from the effects of the Corona pandemic, which has hit central city locations in urban areas especially hard. Gross profit fell by 12 per cent to SEK 1,240 million (1,405), due mainly to lower rental revenue from stores and restaurants.

The loss after tax for the year was SEK -1,462 million (3,146). The decrease can be attributed mainly to negative unrealised changes in the value of the property holdings with a significant proportion of stores and restaurants.

2021 and the future

Our main focus in 2021 will be to bridge the effects of the ongoing pandemic in partnership with our tenants.

Investments in projects will continue, aimed at generating cash flow and profits to the company from a long-term perspective.

Hufvudstaden acquired the NK business within Departments & Stores Europe in early 2021. The business will be run in the subsidiary NK Retail. The acquisition creates opportunities to accelerate the development of digital and physical business within NK, where the goal is to enhance NK’s attractiveness and profitability.

Our financial position is strong and we are well-equipped to take on the challenges and grasp the opportunities that arise over time. In the light of the previously executed share buyback and forthcoming investments, the board of directors is proposing a reduction of the dividend compared to the preceding year, to SEK 2.50 per share.

Over its long history, Hufvudstaden has weathered many external crises and has always emerged stronger than before. Our marketplaces in prime locations in two expansive regions are highly attractive. We will continue along the established path according to our proven business model, while steadily advancing our positions.

In closing, I would like to thank all of Hufvudstaden’s dedicated and professional employees, who have done their utmost during the year to shepherd the company and its customers through a challenging year.

Stockholm, February 2021

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Ivo Stopner
President